Why Cisco Just Took a Big Analyst Downgrade Heading Into 2019

By Chris Lange Updated Jan 11, 1:41PM EST · Published Dec 14, 10:35AM EST

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Why Cisco Just Took a Big Analyst Downgrade Heading Into 2019 — © raisbeckfoto / Getty Images

Cisco Systems Inc. (NASDAQ: CSCO) shares dipped on Friday after the networking firm saw a big downgrade as 2019 quickly approaches. Overall, the downgrading firm sees some of the tailwinds bolstering this stock fading in 2019, which could pose some problems going forward.

Nomura Instinet cut Cisco to a Neutral rating from Buy, but maintained its price target of $50, which implies upside of 5% from the most recent closing price of $47.47.

On one hand, strengthening information technology spending, a muscular, innovation-led refresh cycle and a rising software mix have lifted Cisco’s multiple and its shares to post-recession highs. But the firm believes some tailwinds, notably IT spending strength, may reverse in 2019 to reveal imperfections in Cisco’s story.

According to Nomura Instinet:

Three drivers lifted Cisco to post-recession highs. Through 2018, IT spending growth accelerated materially, Cisco’s new Catalyst 9000 series more than tripled its customer count, and Cisco’s software mix hit 25% of sales. These drivers helped Cisco exceed consensus estimates through 2018, which led to post-recession highs in Cisco’s multiple and share price.

One of these – IT spending – now steady at best. We expect the product refresh (now with the 9200 and 9800) and rising software mix to remain tailwinds. However, spending may be wobbling; comments from Dell, HPE, and Broadcom suggest incremental caution in CIO thinking. Cisco’s ongoing product refresh leaves it insulated, though not immune, from a slowdown.

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The firm considers 12% emerging markets growth (about 10% of sales) above the trend. Unified Computing Systems servers (5% of sales) have benefited from passing through rising memory costs as well.

Cisco’s Webscale remains a strategic hole. Nomura Instinet believes that Cisco has not yet built on initial wins at Microsoft and Alibaba, with webscale making up less than 10% of sales. Weaker IT spending may reveal Cisco’s underexposure to what should be a 15% to 20% growth market in 2019.

Shares of Cisco were last seen down 2% at $46.42 on Friday, with a consensus analyst price target of $52.46 and a 52-week trading range of $37.35 to $49.47.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.